Note: This is another post in my series The ABCs of Buying, Selling and Investing in Real Estate, where I focus on one letter to share something about real estate. This post is centered on the letter C focused on helping real estate investors.
Leroy had been watching HGTV for years, and had finally reached a point where he felt he could do some flipping to help supplement his income as a software engineer. Leroy had bought one property, the one he currently lived in with his family. He felt that years of watching HGTV more then qualified him to start some real estate investing (REI). Leroy found my ad on biggerpockets.com and decided to pick my brain about what one needed to do to get started in REI. We chatted on the phone for about thirty minutes about what it took to be one of the many real estate investors.
Here is what I told Leroy…
First, the HGTV syndrome is a real serious condition that anyone getting started in REI needs to be cured of very quickly. This syndrome instills in an individual that REI is easy and fun. There are few worries you have to tackle with every property, but nothing that prevents one from taking the plunge. This syndrome is dangerous to anyone’s pocket book and their attitude towards REI. Before you start flipping homes, you have to be cured of this syndrome. HGTV is a fantasy world that does have any resemblance to reality.
By telling Leroy this, I could hear doubt and disappointment in his voice. I assured him that you can have a very fruitful career in REI, you just have to be realistic about your plans and expectations, especially in this tight seller’s market. REI right now is a challenge for any investor no matter where they are investing. Sellers are getting what they are asking, in many cases more than asking price, so it is hard to find any property that will bring huge rewards today. However, with a little patience, you will eventually find deals that make sense to real estate investors. It helps if you have cash, but even cash buyers are seeing extreme moves in the market like bidding $10K to $15K over what a property is worth at foreclosure auctions. I told Leroy that if he does not want a lot of frustration then it might be better to wait until we see a downturn in the market. However, he was determined to move forward. With this in mind, I told Leroy he had three phone calls he needed to make today.
Call an Attorney – I am always amazed by how many real estate investors do not have an attorney on speed dial. Real estate is a legal transaction that requires you to have legal counsel whenever a question comes up in the process of buying or selling real estate. I have seen contracts go sideways for very strange reasons from not agreeing on who should replace the roof to a multi-thousand deal crashing and burning over a few thousand dollars. We are lucky in Texas, at least some of think so, that we have a team of about 11 attorneys appointed by the Texas Real Estate Commission to promulgate our real estate forms so non-attorneys can proceed with real estate transactions without the immediate need of an attorney. As a real estate agent, I can take one of the approved forms and put in an offer on a property. It makes real estate a pretty straightforward process. However, it is always best if you are getting into REI to have an attorney review these forms with you so you have a better idea on your obligations and rights as presented in the contract. The most important reason to have an attorney in place, however, is when a transaction goes sideways and people begin to feel cheated or threatened. As an agent, I cannot address legal questions or give out legal advice so if I a deal does become hotly contested, it is always a good idea to have that attorney ready to move for you.
Call a Lender/Financial Adviser – Here is another place that amazes me about people getting into REI, they really have no idea about their own financial health, much less how real estate finance works. You have to get your own house in order before you can start to truly begin your REI career. Otherwise, you are just wasting your time and everyone else’s time. Time means money in REI as much as it does in any other business. If you plan to make cash purchases, you need to sit down with whoever advises you on financial matters and figure out what percentage of your assets you want to put towards REI. Once you have a number, you can then begin to plan on what area of REI you want to tackle. Do you want to flip houses? If so, it takes rehab along with the initial purchase price to do so. It is always best to have a 10% contingency fund as costs will come up that you did not expect. I can always tell when an flipper has run out of money. The updates and upgrades suddenly end. One room will look fantastic while the back bathroom is still a mess. If you plan to buy and hold, you have to sit down and really go over what your annual costs will be. I think most newbie REI are always caught off guard by certain expenses like property taxes, capital expenses and maintenance costs. If you plan to use a property management company for your rentals, make sure to ask the property management company what they cover with their fee and if there are any additional fees not covered by the monthly fee. On the other hand, if you are planning on leveraging your assets and take out a loan for REI, you need to know what you can realistically afford with the mortgage so call several lenders before even beginning the property search. Most lenders will have different requirements for REI than owner occupants. If you can’t get a good interest rate based on your credit, I recommend you take a year to get the credit score up. Higher mortgage costs have prevented many an investor from getting into the game because they are spending all their cash flow on paying back the bank.
Call a Real Estate Agent/Other real estate investors – The last call I would make is to someone who has been in REI for awhile. If you don’t trust us agents, you can always find mentors or other REI willing to help you learn from their mistakes. You should check out REI pages online like biggerpockets.com. These sites will introduce you to the REI community in your area where you can begin to network and meet the key players in the field. Like myself, there are investor friendly agents available to work with you as well. These agents invest in real estate themselves and know the jargon thrown around by the community. They should have a good idea on what you plan to do in REI so they start to search for properties for you. I see my investor clients as life long partners in REI. We hunt and evaluate properties together so I would expect any agent calling themselves investor friendly to do the same thing for you. If you really don’t like agents, a lot of people do not, you can always call a wholesaler to help you find homes at the bargain prices. Most on market deals will not bring you any properties that will make sense from a number perspective. Wholesales work exclusively in finding these distressed properties and bring REI to the seller so they can get out of their painful situation. I work with a couple of wholesalers as well and they do wonderful work on finding these properties. What I cannot provide when it comes to MLS properties, these wholesalers step up to help the client. It is a win-win situation for all of us.
In summary, Leroy was a newbie REI looking for advice on getting started. I told him he should probably wait until the market turns around in a couple of years so he has more options. He didn’t want to do that so I told him he needed to make three immediate calls. He needed to call an attorney to help him through those times when things go sideways. He needed to know what he could afford so a call to either a lender or a financial adviser should be made. Finally, he needed to speak to others, either an agent or another investor, who can unleash some lessons learned from their own experiences in REI.